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Monday, July 25, 2016

How the right disclosure design can help savers to switch to better deals

Conventional consumer protection frameworks claim that the lack of effective disclosure and the existence of deceptive advertising have exacerbated information imbalances
between providers and users of financial services. Also, it is assumed that users frequently fail to make informed decisions because they do not sufficiently comprehend financial products' rules.

From a behavioural point of view, human inertia and status quo bias lead to the puzzling evidence that few customers switch to better deals once they hold a product from a specific provider. In this sense, people might be continuously leaving interest earnings on the table. The issue of consumer inertia helps to explain the frequent offer of front book attractive deals to new customers vs normal deals to inactive long tenure customers. Also, it might be the case that some providers are rewarding long tenure customers with lower fees and better deals not because of their loyalty, but simply due to customers' inaction.A recent study published by the Financial Conduct Authority - FCA conducted a set of randomized control trials to estimate the impact of interest rate disclosure on savers’ decisions. Using data from more than 130,000 saving account holders in the United Kingdom, the research suggests that pre-filled forms and just-in-time digital reminders are effective interventions to encourage savers to switch their money to products offering higher interest earnings.

Simply facilitating searchand comparison might not be the most effective way to help savers to identify higher-paying products and stimulate market competition. For instance, enforced disclosure in the form of a box on the front page of an annual statement containing salient information on higher available rates had only a marginal impact (+3%) on switching behaviour. Alternatively, when similar consumers were provided also with a tear-off return form pre-filled for a switch to the best internal rate, along with a prepaid envelope, the impact on switching was the largest among all trials (+9%). Among customers who held accounts that experienced scheduled rate decreases, an email or SMS reminder was also effective, especially when sent shortly before the rate decrease.

Nevertheless, consumer inertia was still observed in most of the cases. For example, the authors highlight that (p. 6): “Despite switching taking only 15 minutes on average, as reported by respondents of the follow-up survey, the switching level is low (17% across all trials) - even among consumers given relevant information about more attractive interest rates.” Furthermore, despite the fact that all interventions increased switching within providers, they were ineffective to stimulate switching to better deals available from other firms.In summary, policy designs should not only facilitate searchand encourage comparison of different products. To stimulate market competition, financial regulation could attempt to simplify switching and stimulated savers’ attention to relevant information.